The popularity of Indian equities among global fund managers slumped to an 11-month low in November, hot on the heels of India emerging as Asia’s top investment destination.

According to a Bank of America Merrill Lynch (BofA- ML) global fund manager survey, in November, investors were 11 per cent underweight on Indian stocks. While BofA-ML did not give any reason for the sudden investor aversion to Indian stocks, analysts said premium valuations to most other emerging markets, following the market rally this year, and no improvement in economic parameters could have led to the aversion.

“Data on India’s industrial output growth suggest the economy is facing severe supply-side constraints, which is leading to the odd combination of weak domestic output, high and sticky inflation and a widening trade deficit,” Nomura economists Sonal Varma and Aman Mohunta said in their Asia Insights report. “Until the bottlenecks (land reforms, setting up the National Investment Board) are addressed, we expect India’s growth recovery to remain shallow, as the economy would be quick to hit a ceiling,” the report added.

LOSING APPETITE

15-Nov-12

% change

Americas

Close

YTD

Mexico IPC

40,750.42

9.91

Brazil Bovespa

56,279.36

-0.84

Asia

SET (Thailand)

1,274.02

24.26

PSEi (The Philippines)

5,414.82

23.85

NSE

5,631.00

21.77

Sensex

18,471.37

19.52

Hang Seng

21,108.93

14.51

Jakarta Composite

4,351.28

13.85

Straits Times Index

2,945.92

11.32

Nikkei 225

8,829.72

4.43

Kospi

1,870.72

2.46

Taiwan Taiex

7,143.84

1.01

Shanghai SE Composite

2,030.29

-7.69

Source: Bloomberg Data compiled by BS Research Bureau

While most other emerging markets are trading between eight and 11 times the estimated earnings, the Sensex is trading at 13.17 times. So far this year, benchmark indices have gained about 20 per cent. On Thursday, the BSE Sensex closed at 18,471.37, a loss of 147.5 points.

In October, India had enjoyed an overweight position of about five per cent in the BofA-ML survey. It was ahead of South Korea, Malaysia, Taiwan, Indonesia and the Philippines. This month, net allocation to South Korea rose to a 21-month high, while China’s position improved from net 15 per cent overweight in October to 25 per cent in November.

The waning interest in Indian equities was reflected in the slowing of the rally in Indian stocks and the rupee. After hitting a high in the first week of October, India’s benchmark indices have lost about 3.5 per cent. In November, the rupee fell about two per cent against the dollar. On Thursday, it traded at 54.69 against the dollar, below October’s 54-levels.

However, the dwindling interest in Indian equities wasn’t reflected in foreign institutional flows into the country. So far this month, foreign investors have pumped in about Rs 3,400 crore, raising their net purchases tally since January to Rs 97,000 crore. Though investors have taken note of the slew of pro-business measures recently announced by the government, there is increased realisation the benefits of these reforms would accrue only over a period. In a report, Credit Suisse said, “The change (economic reforms) is encouraging and the worrying anti-business rhetoric seems firmly behind us. However, it may take six to eight years from reform intent to impact, and the investment cycle is unlikely to recover for the next three to four years.”